For the past four years, small businesses have enjoyed an annual $500,000 tax break for purchases of technology and other equipment. But this year, the deduction plummets to $25,000 unless Congress acts to increase it.
Section 179 of the tax code allows companies to deduct technology and other equipment in the year it is purchased. It provides an immediate deduction versus the normal depreciation schedule, which for hardware spreads out the deduction over a five-year period.
A Brief History of Section 179 Deductions
U.S. lawmakers have repeatedly increased the Section 179 deduction since 2003 to give businesses a tax break and entice them to spend more to boost the economy.
First, Congress quadrupled the annual deduction from $25,000 to $100,000 and let companies deduct off-the-shelf software. Congress renewed the higher deduction and the software provision in the ensuing years, doubling it to $250,000 in 2008 and 2009 and then doubling it again to $500,000 from 2010 to 2013.
But the higher deduction, along with the off-the-shelf software deduction and a 50 percent bonus depreciation, expired at the end of last year. The tax break returns to the original $25,000 limit with an adjustment for inflation for the 2014 tax year.
Accountants say it is possible that Congress will increase the deduction again for 2014 since it has approved a larger deduction for the past decade.
“If Section 179 stays at $25,000, and if a company spends more than that on equipment, then it effectively amounts to a tax increase, and members of Congress, particularly those who are running for re-election, don’t want to be associated with a tax increase,” says Julian Block, a tax attorney in Larchmont, N.Y, and author of several tax tip books.
Senate Majority Leader Harry Reid has proposed extending the higher Section 179 deduction, along with extending 54 other deductions that expired at the end of last year. But recently, Sen. Orrin Hatch told Bloomberg News that each tax break must be reviewed on a case-by-case basis.
“It’s January, and Congress is wrangling again [over spending], so it could be a while before there’s any legislation,” Block explains.
Spend Based on Business Need, Not Tax Deduction Amount
If the deduction stays at $25,000, businesses still benefit. If they spend more than $25,000, they have to deduct the remainder using the normal depreciation schedule. Technology that qualifies for the deduction includes computers, servers and networking equipment. Office equipment and furniture purchases also qualify.
Section 179 limits how much companies can spend on equipment to qualify for the entire deduction. In 2013, the spending limit was $2 million. For 2014, spending cannot exceed $200,000. Every dollar spent above the limit must be subtracted from the deduction.
So how should small businesses plan equipment purchases in light of the uncertainty of the Section 179 deduction? Block says companies should make purchases based on their needs, not based on the amount of the tax deduction.
“If you don’t get an immediate deduction, it’s not like you will never get a tax break, you just get it over a four- to five-year period, depending on the type of item,” he says. “When you are talking about computers or printers, the question is, does your business need them? Will the benefit to your business be more than what you are spending? It ought not be looked at as purely a tax deduction.”